How to calculate restaurant Prime Cost: formula and example

A full dining room is not the full picture

In hospitality, it is easy to focus on turnover, guest numbers and occupied tables. But a busy restaurant is not necessarily profitable. What matters is how much of its sales remains after costs.

Prime Cost is one indicator that helps assess this. It combines product and labour costs: two major cost groups influenced by everyday decisions. It does not, however, include every restaurant expense.

What is included in Prime Cost?

The first element is the cost of food and beverages consumed. This is not the same as the total of purchase invoices. Some purchases may still be in stock, while this period’s consumption may include opening stock.

For a simple whole-venue reconciliation, consumption equals opening stock value plus purchases minus closing stock value. Account for returns and transfers to and from other properties too, using consistent stock valuation. Waste is already included in this calculation if stock and movements are recorded correctly. Do not add its value again. A waste log helps explain how products were used.

The second element is the full labour cost allocated to the same period. Include wages, employer costs, overtime, bonuses and external labour on a consistent basis. Take-home pay alone does not represent employment cost. Add employer contributions to gross pay; do not add employee deductions again, as they are already part of gross pay.

If the owner works without remuneration recorded as a cost, show their hours and the estimated replacement cost separately. This is an additional economic scenario, not another addition of a cost already included.

Prime Cost can be expressed as an amount or a percentage of sales. Product costs, labour costs and sales must relate to the same period and property or department. Product and sales figures in this example exclude VAT.

Calculate Prime Cost step by step

Suppose a restaurant generates PLN 100,000 of monthly sales excluding VAT. Opening product stock is PLN 12,000, purchases are PLN 35,000 and closing stock is PLN 15,000. With no returns or transfers, consumption is PLN 32,000. Full labour cost for the month is PLN 35,000. All figures are fictional and illustrate the method, not recommended cost levels.

Prime Cost is PLN 67,000, or 67% of sales. That leaves PLN 33,000 for other costs and any profit. It is not yet profit: rent, utilities, commissions and other operating costs still need to be covered.

At the same sales level, an increase in Prime Cost to 72% leaves PLN 5,000 less for other expenses and profit. That is an increase of 5 percentage points. When sales change, compare both percentages and amounts.

How should you interpret 67%?

For every PLN 1 of sales excluding VAT, PLN 0.67 covers products and labour in this example. PLN 0.33 remains for other costs and any profit. If other monthly costs are PLN 30,000, sales exceed this set of costs by PLN 3,000. With PLN 36,000 of other costs, the result is minus PLN 3,000 despite the same Prime Cost. These results are after the listed costs. A complete financial assessment requires all costs for the period, including depreciation and finance costs where applicable, and clarity on whether the result is before or after income tax.

A figure of 67% is therefore neither good nor bad on its own. Review product and labour costs separately, compare similar periods and establish what must remain for your other costs. Profit and bank balance may differ because of payment timing, stock and capital expenditure.

Sales but no profit? Explore other possible causes

Where does money start to disappear?

A rising Prime Cost often stems from many small discrepancies repeated every day, rather than one major decision.

• Portions exceed the recipe quantity used to calculate dish cost.
• Unrecorded losses, overproduction or waste are missing from calculations.
• Purchasing does not match demand, or supplier prices change without recipe updates.
• The rota does not match demand and order volumes throughout the day.
• Overtime arises from unclear duties, poor preparation or rework.

See how to match staff scheduling to restaurant demand

Review regularly, using comparable data

Do not wait until month end to monitor costs. Track sales, hours worked, waste and recipe deviations daily. Review these together each week to identify trends.

A reliable weekly Prime Cost requires consumption and labour cost data for that week. If you use recipes instead of a full stocktake, or estimated labour costs, label the result as an estimate. Later, compare it with a reconciliation based on actual data.

Analyse products and labour separately. The same combined result may hide improvement in the kitchen and deterioration in shift organisation. Compare similar periods and account for seasonality, events and sales mix.

The indicator points to questions, not a verdict

A rising cost percentage does not always mean poor management. It can also reflect falling sales, higher supplier prices or temporary training costs. Prime Cost is a signal to investigate causes.

No single value proves that every restaurant is profitable. Service model, offering, prices and other costs all matter. Cutting labour at the expense of service may also weaken sales.

Ask about sales and the cost of delivering them

Alongside ‘How much did we sell today?’, regularly ask ‘What did the products and labour needed for those sales cost us?’ Combining these figures with other costs gives a fuller picture.

At Hospitality Pro, I assess F&B through figures, processes and everyday decisions. If your venue generates sales without the financial results you expect, I help establish where discrepancies arise and where to start making changes.